Meaning of Petty Cash Book
A Petty Cash Book is a subsidiary ledger used to record small, day-to-day expenses incurred by a business. These transactions typically include minor expenditures such as office supplies, transportation, and small repairs. The petty cash system operates on an imprest basis, where a fixed amount of cash is kept on hand and periodically replenished to a predetermined level.
Examples of Petty Cash Uses:
- Office Supplies: Purchasing pens, notepads, and other office materials.
- Travel Expenses: Paying for cab fares or public transportation ticket fees for short trips.
- Meal Reimbursements: Reimbursing employees for light refreshments or lunches purchased during work hours.
- Minor Repairs: Expenses for small maintenance tasks such as changing light bulbs or fixing office furniture.
- Miscellaneous Expenses: Other nominal expenses essential for daily operations, like postage stamps.
Frequently Asked Questions (FAQs)
What is the purpose of a Petty Cash Book?
The purpose of a Petty Cash Book is to provide an organized method of recording and tracking minor business-related expenses. It ensures accountability and accurate cash management within the organization.
How does the Imprest System work with petty cash?
The imprest system involves maintaining a fixed petty cash fund. When the fund is depleted, it is reimbursed to its original level with an amount equal to the petty expenses recorded. This system helps in close monitoring and control of petty cash expenditures.
Who is responsible for maintaining the Petty Cash Book?
The responsibility typically lies with a designated petty cash custodian, often an accounting clerk or office manager, who ensures that each expense is documented and that the petty cash fund is not misused.
How are petty cash transactions recorded?
Each petty cash transaction is recorded in the Petty Cash Book with details such as the date, amount, purpose of the expense, and the receipt of payment. These transactions are then periodically reviewed and reconciled with the remaining cash balance.
What happens if there is a discrepancy in the petty cash fund?
Any discrepancies in the petty cash fund must be immediately investigated. If an error or misuse is identified, corrective actions, including possible adjustments in internal controls, should be implemented.
- Imprest Account: A fixed amount of money set aside for minor expenses, replenished periodically to maintain a consistent balance.
- Voucher: A document evidencing a petty cash transaction, including receipts or expense forms, that provides proof and details of the expenditure.
- Reconciliation: The process of comparing the recorded transactions in the Petty Cash Book with actual cash on hand to ensure accuracy and completeness.
- Float: The initial amount of cash provided in a petty cash system, also known as the petty cash fund.
Online Resources for Further Learning
- Investopedia: Petty Cash
- Accounting Coach: Petty Cash System
- Corporate Finance Institute (CFI): Petty Cash Management
Suggested Books for Further Study
- Principles of Accounting by Belverd E. Needles
- Financial Accounting: An Introduction by Pauline Weetman
- Intermediate Accounting by Donald E. Kieso, Jerry J. Weygandt, and Terry D. Warfield
Accounting Basics: Petty Cash Book Fundamentals Quiz
### What is a Petty Cash Book mainly used for?
- [ ] Recording large business transactions.
- [x] Recording minor or small financial expenditures.
- [ ] Recording all company expenses.
- [ ] Only for recording employee salaries.
> **Explanation:** A Petty Cash Book is specifically used for recording minor or small financial expenditures that occur in daily business operations.
### How does the imprest system relate to petty cash?
- [x] It maintains a fixed petty cash fund to be replenished periodically.
- [ ] It randomly adjusts the petty cash fund based on needs.
- [ ] It mixes petty cash with main cash reserves.
- [ ] It removes the need for documentation of petty expenses.
> **Explanation:** The imprest system keeps a fixed petty cash fund that is periodically replenished to its original level based on the documented minor expenses, ensuring control and accountability.
### Who generally manages the petty cash fund?
- [ ] CEO of the company.
- [x] Designated petty cash custodian or accounting clerk.
- [ ] Department manager.
- [ ] All office staff.
> **Explanation:** The petty cash fund is typically managed by a designated petty cash custodian or accounting clerk to ensure controlled and documented usage.
### What is the purpose of a petty cash voucher?
- [x] To provide proof and details of each petty cash expenditure.
- [ ] To deposit large sums of money.
- [ ] To transfer funds between accounts.
- [ ] To calculate monthly profits.
> **Explanation:** A petty cash voucher serves as proof of each petty cash transaction with detailed information about the expense, ensuring proper documentation and verification.
### If discrepancies are found in petty cash, what should be done?
- [x] Investigate the discrepancies immediately and take corrective actions.
- [ ] Ignore the discrepancies.
- [ ] Increase the petty cash fund.
- [ ] Transfer funds from the main account.
> **Explanation:** It is necessary to investigate discrepancies in petty cash immediately and implement corrective actions to prevent misuse or errors.
### What type of account is a Float associated with in the petty cash system?
- [ ] Liability account.
- [ ] Revenue account.
- [x] Imprest account.
- [ ] Equity account.
> **Explanation:** The float refers to the fixed amount of cash initially provided in the petty cash system, an essential component of an imprest account.
### How often should petty cash be reconciled?
- [x] At regular intervals, such as weekly or monthly.
- [ ] Never.
- [ ] Only at the end of the fiscal year.
- [ ] Every few years.
> **Explanation:** Petty cash should be reconciled at regular intervals to ensure that the recorded transactions match the actual cash available, maintaining accurate records and preventing discrepancies.
### What document typically supports a petty cash transaction?
- [ ] An annual report.
- [ ] A bank statement.
- [x] A receipt or voucher.
- [ ] A shareholder agreement.
> **Explanation:** Receipts or vouchers support petty cash transactions by providing detailed proof of each expense made from the petty cash fund.
### What should a Petty Cash Book detail for each transaction?
- [ ] Only the total expense for the month.
- [ ] Just the name of the employee.
- [x] Date, amount, purpose, and receipt of the expense.
- [ ] Only the cash-in-hand balance.
> **Explanation:** Each entry in the Petty Cash Book should detail the date, amount, purpose, and supportive receipt of the expense to ensure transparency and accurate record-keeping.
### What happens when the petty cash fund is depleted?
- [ ] The account is closed.
- [x] It is replenished to its original fixed amount.
- [ ] Funds are transferred from the main account without any checks.
- [ ] Additional funds are added arbitrarily.
> **Explanation:** When the petty cash fund is depleted, it is replenished to its original fixed amount as per the imprest system, ensuring continued availability for minor expenses.
Thank you for embarking on this journey through our comprehensive accounting lexicon and tackling our challenging sample exam quiz questions. Keep striving for excellence in your financial knowledge!
